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Performance summary

Profit after tax grew a whopping 185% YoY due to the growth operating profit, a rise in other income as well as lowering of the effective tax rate during the quarter.

The consolidated order back log of the company stood at Rs 60.7 bn at the end of 2QFY15.

Standalone performance snapshot

(Rs m)

2QFY14

2QFY15

Change

1HFY14

1HFY15

Change

Income from operations

10,296

11,813

14.7%

18,807

20,120

7.0%

Expenditure

9,496

10,685

12.5%

17,310

18,488

6.8%

Operating profit (EBDITA)

800

1,128

40.9%

1,496

1,633

9.1%

Operating profit margin (%)

7.8%

9.5%

8.0%

8.1%

Other income

212

326

54.2%

411

590

43.5%

Interest

19

24

27.5%

27

54

100.7%

Depreciation

140

182

30.1%

282

332

17.4%

Profit before tax

853

1,248

46.3%

1,598

1,837

14.9%

Tax

551

388

-29.6%

794

563

-29.1%

Profit after tax/(loss)

302

860

185.0%

804

1,274

58.4%

Net profit margin (%)

2.9%

7.3%

4.3%

6.3%

No. of shares

119.15

Basic & Diluted earnings per share (Rs)*

25.2

P/E ratio (x)*

37.5

* On a trailing 12-months basis

What has driven performance in 2QFY15?

The energy segment managed to see a robust increase in revenues of 22% YoY which propelled the growth in overall revenues; while environmental segment’s revenues decreased 1% YoY.

The margin expansion was led by a fall in staff costs as well as other expenditure as a percentage of sales. Raw material costs as a percentage sales, however, saw a marginal increase. EBIT margins in the Energy segment saw an expansion thus driving the company’s operating margin expansion this quarter. Other income has been boosted by interest paid by tax authorities to the company and forex gains made during the period.

Standalone order inflows grew 42% YoY, and have been driven by an improvement in the demand of the company's standard products in the domestic market and by project orders from the international market.

During the quarter, the company's joint venture - Thermax Babcock & Wilcox Energy Solutions - received a Rs 3.4 bn export order for engineering, manufacturing and supply of selected items for two boilers for an international project. The boilers will be manufactured at the JV's manufacturing facility in Shirwal, Maharashtra which has been hereto suffering from idle capacity on the back poor demand.

Segment-wise performance (Standalone)

2QFY14

2QFY15

Change

1HFY14

1HFY15

Change

Energy

Revenue (Rs m)

7,851

9,562

21.8%

14,190

16,008

12.8%

% share

74.5%

78.3%

73.6%

77.0%

PBIT margin

11.7%

12.2%

11.7%

9.9%

Environment

Revenue (Rs m)

2,684

2,646

-1.4%

5,081

4,794

-5.7%

% share

25.5%

21.7%

26.4%

23.0%

PBIT margin

9.0%

7.5%

9.0%

6.2%

Total

Revenue (Rs m)*

10,535

12,208

15.9%

19,271

20,802

7.9%

PBIT margin

11.0%

11.2%

10.9%

9.0%

* Excluding others & inter-segment adjustments

What to expect?

This is the first quarter for the company where international order intake has surpassed domestic order intake. The management has indicated that excluding this boost from international orders, it would have been a fairly low performance as far as order inflows are concerned.

The management has opined that the company has passed through the worst of the times over the past 18 months or so. Going forward, while the signals are positive, actions are yet to be initiated. The management has expressed its intent to be calibrated in taking orders in the international market and not just take orders in various countries for the sake of building revenues and then have difficulties later, which is a situation that many other Indian engineering majors have found themselves in.

At the current price of Rs 945, the stock is trading at a multiple of 20.4 times our FY17 earnings estimates for the company. Given its expensive valuations; we maintain a SELL view on the stock.

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